preparing for a gathering storm: capa airline survival ... · preparing for a gathering storm: capa...

16-17 September, 2019

Share your thoughts #CAPASummit

Preparing for a gathering storm: CAPA Airline Survival Toolkit for LCCs

17th September 2019



Like any business, it is beholden on management to prudently manage an airline through a downturn to minimize

the impact on profitability and shareholder returns. But given the inevitability of a downturn in the industry,

stakeholders expect management to be properly prepared.



During time of recessions the first cost line for most businesses to be scrutinized is travel. This should play well to LCCs asbusiness travelers are encouraged to trade down from FSC to LCCs. However the LCCs that will most benefit from this trend will be those that position themselves to be more “business friendly” without changing their core LCC business model e.g.:

a. Given most business travelers travel with carry on only – how does an LCC accommodate this?

b. Business travelers want a speedy seamless trip through the airport – and thus are willing to pay for expedited check-in/security/boarding etc. How does the LCC accommodate (and monetize) without changing their business model?

c. Given business travelers are time sensitive what is the LCC’s philosophy on OTP as OTP becomes a differentiator in the minds of the business traveler

d. Business travelers are willing to pay for a better seat (e.g. emergency exits, forward seats, aisle seats) – how can LCCs both accommodate and monetize?

Commercial opportunities



Capture more of the passengers’ travel walletAir travel is not the only part of the travel budget that is scrutinized during a recession – given the LCCs direct (lower cost)distribution model, how can it both add value to customers but also capture more of their share of wallet by providing better deals on accommodation, ground transportation etc. For example a strategy very successfully executed by Allegiant in the leisure market that can be adopted in the business market.

Maximize ancillary revenuesLCCs have conditioned their customers on optionality that comes from ancillary revenues. As LCCs accommodate more business travelers within their existing business models, ancillary revenues are the ideal means to provide business travelers with some of the product attributes they want (i.e. avoidance of “pain points”) and allow them to differentiate from other LCCs.

LCCs should also look for other sources (and perhaps suppliers) to deliver new forms of ancillary revenues e.g. neighbor free seating, enhanced food for sale options etc.

Commercial opportunities



q During a recession LCCs should pull back on their growth ambitions and may also require paring back developing routes until the market recovers so as to preserve cash during the recession.

q And the same applies if an LCC operates within a Group structure – how best to deploy Group resources to weather a downturn will differ depending upon the resilience of each group airline’s market position

q Work closely with airline partners. In a recession, like any airline, LCCs need to source as much incremental revenue as possible that can come through commercial partnerships. This should and can be done in a low cost “light” manner without changing the core business model of the LCC (e.g. easyjet’s Global Connect product).

Wise asset allocation becomes even more critical as does working with partners



Reduce capacity. While daily utilization is a key value driver for most airlines, load factor trumps utilization in terms of value creation, especially in a recession. As such manage to maximize load factor by taking out capacity.

q Maintain fleet flexibility by staggering lease renewals (Copa example)

q Maintaining older/lower ownership cost aircraft

Defer fleet orders as far out as possible. The worse possible time to be levering up the balance sheet with expensive new aircraft is during a recession

However a good time to place orders, just not take deliveries (e.g. Ryanair)

Operational/Financial Opportunities



Use reduced flying activity to re-set the business for the recovery e.g. clear up outstanding crew leave entitlement, use excess capacity to bring forward heavy maintenance etc.

Maintain investments that allow you to respond quickly when recovery comes e.g. maintain pilot recruiting and cadetship programs. Eliminate unnecessary structural overhead. As the airline has grown what functions have been added that are not essential to maintaining the low cost model and should be jettisoned.

In the case of Group airlines assess what can be centralized Vs staying in the individual airlines.Move as much as possible towards “virtual” airline – what fixed costs can you turn into variable (or at least allow you to flex cost base in downturn e.g. staggered aircraft leases).

LCCs should excel here as their traditional core business model has been to outsource as much as possible this does help mitigate the impact of the recession. But a recession should be the time for an LCC to re-assess the balance between existing inhouse vs outsourced resources.

Operational/Financial Opportunities



As with FSCs, LCCs need to engage with labor during a recession and maintain open communication to ensure that labor better understands the actions being taken by management to weather the storm.

Communicate and better engage with key stakeholders

preparing for a gathering storm: capa airline survival ... · preparing for a gathering storm: capa...

Documents